Fed Faces Dilemma: Sticky Inflation vs. Cooling Labor Market

data has been sticky, which dulls the case for more cuts. The counter-argument points to a gradual but conspicuous softening of the labor market. The Fed has a dual mandate to minimize inflation and maximize employment, but sometimes conditions require the central bank favor one over the other, if only slightly.

But on the employment front there are signs that the labor market is slowing. It’s modest, at least so far, while the unemployment rate remains low at 4.2% in November. But the Fed seems increasingly focused on supporting. Over the last several months, new filings for unemployment benefits have been rising vs. the year-earlier levels. The rise is relatively moderate so far, but the change gives the Fed a degree of cover for taking pre-emptive action to provide employment support.

Note, too, that the negative bias has been easing in recent months and so this warning sign may reflect noise due to the lingering effects of the pandemic on the economy.

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